Are Consumer Bank Customers Mules – Or Will They Move if Kicked Hard Enough?
During the heyday of the credit card business, I once had an executive at a major Visa-MasterCard issuer fantasize over a few drinks of an even-more-profitable business model than the one he already oversaw – which then was lending at 19.6%, funding the business at a good deal less than 10%, and in those days writing off 3%-to-5% of the loans as losses. It was hugely profitable and growing.
Anyway, into his third cocktail or so, this guy, in the spirit of taking advantage of people unsophisticated enough to borrow at those rates, wondered if consumers could be persuaded to borrow against their Visa at 19.6% and to then invest in a bank-managed mutual fund, yielding in the single digits. “Now that would be a great business,” he laughed.
The exchange comes to mind as one watches the current, halting efforts by big banks to charge consumers higher fees, especially on deposit accounts. The bankers, of course, feel they have the fees coming because of the splendid service they provide. And having consolidated the industry, the biggest banks are further emboldened by this thought: where else are you going to go? The four largest banks – Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC) – through normal acquisitions and government-assisted takeovers of insolvent institutions, now control more than half of banking deposits, by some counts.
Consumer deposits, as the banks are now counting on, exhibit incredible inertia. That makes them very valuable, especially in a panic. During the 1980s, for instance, Bank of America was nearly as big a mess due to bad loans as was Continental Illinois. The difference was BofA’s huge California branch system, which brought in more deposits than the bank needed to run its business. At the height of the 1980s banking crisis, BofA was calmly lending money to other troubled banks -- including Continental, which quickly failed because it had no such branch network -- and was able to work its problems out over time. Otherwise, BofA might have been kaput.
And still they take us for granted. Our checking accounts. Our savings accounts. Our IRAs. Our CDs. Fees. Fees. Fees. Fees. It’s reminiscent of the way big banks pretend that they’re actual free-market businesses, and complain about regulation, when in fact federal deposit insurance amounts to a huge federal subsidy of the industry (and the FDIC premiums banks pay for that insurance don’t begin to cover the true cost). They essentially want the subsidy without any of the societal responsibilities that go along with it.
This guy, writing smartly in the New York Times this past weekend, holds out hope that consumers will get pissed off and go sign up at a credit union or at other institutions that aren’t fee crazy.
JPMorgan, and its high-self-esteem CEO Jamie Dimon, seem to feel consumers have little choice, as the bank seeks $20-a-month fees on checking accounts (see fifth brief here), BusinessWeek reports.
Lots of banking regulators and writers seem more shocked at how ungrateful big banks are toward the federal government, even after Uncle Sam bailed them out and let most of the bankers keep their jobs. Treasury Secretary Tim Geithner beefed about that on the Wall Street Journal’s oped page recently.
But perhaps we’d do better to focus on the relationship between banks and their customers. Their little ones. If we indeed are stupid mules and don’t budge even if they keep jacking up the fees on us, the very same customers who provide the deposits that keep them in business, shame on us. There won’t be meaningful price competition if customers don’t react to prices.
If we do start to migrate – to credit unions, to smaller banks that need deposits to grow, to online banks with lower costs that can afford to pay higher rates and charge lower fees – then the Big Four commercial banks charted above are going to look more like investment banks. Goldman Sachs (GS) and Morgan Stanley (MS) and other investment banks, of course, tend over time to trade at lower multiples because of the risk inherent in their business model (including being funded by hot money). Our commercial banks, without heaps of consumer deposits, would find those branch networks even more costly, and the whole the fat-and-happy nature of their business would cease.